Step-by-step guide to dealing with debt

Debt can be frightening. What starts as the odd missed credit card or loan repayment can quickly escalate to an unmanageable burden that keeps you awake at night.

Even if you feel in control of your debt, a nagging credit card balance or lingering overdraft can hold you back financially, so follow our guide to dealing with the beast of debt.

1. Face up to it
Ignoring debt won't make it go away. Open those bills, statements and letters, and jot down the total amount owed on each loan, credit card and overdraft. Include outstanding household bills that remain unpaid and don't forget any extra debts, like store cards or finance deals – they often charge the most interest.

Don't shoulder the burden alone, talk to a trusted friend or family member, and take advantage of free debt advice from charities such as the Consumer Credit Counselling Service, Citizens Advice or National Debtline.

2. Take action
Prioritise your debts by dealing with any secured commitments first – these are contracts where the lender can take something away if you stop paying, such as mortgage, rent, utility and insurance providers.

Reply to letters from creditors and enclose any documentation that supports your case if you have missed a payment or fear you soon might, such as a doctor's certificate if signed off work or a redundancy letter. Reply to any court summonses promptly – ignoring them will be a further black mark against your name – it is crucial to cooperate and demonstrate that you want to pay.

3. Draw up a budget
Now you know how much you owe, you need to figure how much you can afford to repay. All lenders will want to know what your disposable income is – the amount left over from your income each month after all necessary living expenses are covered.

Draw up a simple budget with pen and paper or an Excel spreadsheet, or use one of the many free online budgeting tools, such mint.com. Jot down how much income your household receives each week, fortnight or month – including pensions, benefits, family allowance and tax credits. Now write a column of essential expenses, such as housing costs, council tax and utilities, followed by a second column of all other day-to-day and irregular expenses for your entire paycheck period, such as groceries, travel and housekeeping costs.

Add priority and day-to-day costs together, and subtract from your total income – this is your disposable income and what you can truly afford to pay toward your debts.

4. Take free advice
Depending on the size of your debts, you may be able to deal with repayments yourself, but if the amount feels overwhelming and your outgoings are more than your income, get professional help.

In most cases it is advised to seek free advice from debt charities, as many debt management firms have been in the firing line for charging high fees and giving poor advice to vulnerable debt-laden people.

5. Choose a debt solution
There are a number of debt solutions including debt management plans, debt consolidation loans, debt relief orders, individual voluntary agreements (IVAs) and bankruptcy. The best one for you will depend on your personal circumstances, including the amount of debt and your ability to repay. There's no one-size-fits-all approach, so it's vital to seek free advice from a debt charity if you are unsure what will work best for you.

6. Learn from mistakes
Identifying what got you into debt in the first place will help to avoid it happening again. If you have developed a reliance on credit, try to change your attitude towards borrowing and spending, and focus on learning to budget and live within your means.

Keep a spending diary to track areas where you overspend and look for easy purchases to cut back on. Try working in cash instead of debit card - withdraw a set amount to spend each week and challenge yourself to stick within your limit.

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